Disclosure Duties in Real Estate Sales and Attempts to Reallocate the Risk
Posted: 15 May 2001
Date Written: May 9, 2001
In the past, a seller of real property could insulate himself from liability to the buyer for defects in the condition of the property being conveyed. All the seller had to do was to say nothing. As long as the seller avoided affirmative misrepresentations, the doctrine of caveat emptor or "let the buyer beware" placed the burden on the buyer to discover any problems. This has changed. Now, as a result of both court decisions and statutes, most, but not all, jurisdictions impose on a seller of real property an affirmative duty to disclose to a buyer a latent material defect in the condition of the property of which the seller is aware.
With the duty of disclosure, the initial allocation of the risk of loss due to the existence of a defect in the condition of the property has been shifted from the buyer to the seller. While public policy supports this initial allocation of the risk, it does not compel the conclusion that the risk must remain on the seller.
Jurisdictions have adopted differing rules on the issue of whether the parties, by contract, can reallocate the risk of loss back to the buyer. Several states have passed statutes that specifically sanction such a shift by authorizing sellers to disclaim liability for any defects. Because most jurisdictions do not have disclaimer statutes, willing buyers and sellers have sought other ways to accomplish their goal.
The most common method employed is the inclusion of an "as is" clause in the contract of sale. However, whether the courts will enforce such "as is" clauses is a matter of considerable disagreement. No jurisdiction will allow an "as is" clause to shield a seller from liability where she has made an affirmative misrepresentation as to the condition of the property. The difference of opinion occurs in nondisclosure cases. The majority of courts refuse to give effect to "as is" provisions that purport to limit a seller's duty to disclose defects, even where no affirmative representations have been made. Integration clauses coupled with "as is" clauses do not help the seller.
It is the thesis of this article that the parties should be free to shift the risk of the existence of a nondisclosed defect back to the buyer. A risk aversive seller may want to avoid the risk of future litigation alleging he failed to make a required disclosure. A buyer may be willing to assume this risk in exchange for some other contractual provision, such as a reduced purchase price. As long as the contract is not adhesive, the parties should be able to enter into this bargain and the courts should enforce it.
Such a result is supported by policy considerations. It would be economically efficient, it would promote certainty, it would avoid litigation, and it would promote marketability of property. Furthermore, precedent exists for allowing such "as is" or exculpatory clauses both under contract and tort law.
JEL Classification: K11, K12
Suggested Citation: Suggested Citation